Off icials mess up house price forecasts

Officials have repeatedly underestimated the extent to which house prices would rise over recent years by a significant margin, new analysis of forecasts shows.

Brad Olsen, principal economist at Infometrics, has compared forecasts for house price growth from Treasury and the Reserve Bank to the actual movement of prices.

The furthest from the mark was the Budget Economic and Fiscal Update from 2020, which forecast a fall in house prices with the arrival of Covid, to a national average of just over $600,000 in 2021.

In reality, house prices lifted by more than 25% on an annual basis through 2021 and reached an average of about $900,000 by the middle of 2021.

That same estimate suggested that the average price would have been $644,974 in March this year but it was $1.035 million.

Olsen said forecasts for the March quarter of this year varied from $390,000 lower than actual prices to nearly $47,000 higher.

That was the only time that forecasts have overshot actual prices in the forecasts surveyed.

Olsen said it had been a particularly difficult time to predict the direction of house prices. ‘‘I remember where I was standing talking about what Covid might do to the economy and house prices – we thought they would come off about 10%. Everyone had that thought – we got it wrong.’’

He said it highlighted how hard it was to accurately consider the various drivers of the housing market and their influence.

Prices could be affected by sentiment, interest rates, new housing development, banking regulations, changes in the population and the rate of building.

‘‘Trying to anticipate the next move is difficult. These forecasts are out by hundreds of thousands of dollars, that’s an insane amount of money we’re asking young Kiwis to come up with when they are trying to buy a home. There are social challenges given how cooked the housing market has become.’’

He said attention was now on prices dropping but how long that would continue, and to what degree, remained open questions.

Olsen said Treasury and the

Reserve Bank should have an open conversation about the drivers they considered when determining their house price forecasts.

Dominick Stephens, chief economic adviser at The Treasury, said forecasting was always uncertain but his team recognised the importance of doing the best job they could.

He said a technical working group had been formed that would help Treasury and the Reserve Bank better understand the housing market. It had upgraded the weight it gave interest rates in house price modelling to reflect the influence they had.